Could The Market Be Wrong About Telekom Malaysia Berhad (KLSE:TM) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Telekom Malaysia Berhad's (KLSE:TM) recent performance, when its stock has declined 9.6% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study Telekom Malaysia Berhad's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Telekom Malaysia Berhad

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Telekom Malaysia Berhad is:

14% = RM1.1b ÷ RM8.1b (Based on the trailing twelve months to December 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.14.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Telekom Malaysia Berhad's Earnings Growth And 14% ROE

At first glance, Telekom Malaysia Berhad seems to have a decent ROE. Especially when compared to the industry average of 8.9% the company's ROE looks pretty impressive. This probably laid the ground for Telekom Malaysia Berhad's moderate 16% net income growth seen over the past five years.

Next, on comparing Telekom Malaysia Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 15% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is TM fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Telekom Malaysia Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 54% (or a retention ratio of 46%) for Telekom Malaysia Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Telekom Malaysia Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 52% of its profits over the next three years. Accordingly, forecasts suggest that Telekom Malaysia Berhad's future ROE will be 14% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Telekom Malaysia Berhad's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.